What has happened to CITGO’S credit rating?

www.vheadline.com Posted: Tuesday, March 11, 2003 By: Oliver L. Campbell

VHeadline.com guest commentarist Oliver L. Campbell writes: According to recent press announcements, CITGO is worth anything from 10 to 20 billion dollars.  This would seem highly unlikely since CITGO’S balance sheet at 31 December 2002 (given below) shows the Shareholder’s Equity is only $2.6 billions. Of course, the equity per the accounts is one thing and the value of the company is another.  However, the former must be multiplied by four to reach the $10 billion mark which  makes this figure look distinctly suspect.

CITGO Petroleum Co.   Balance Sheet 31 Dec. 2002 Assets  Less 6,986,912 Long term debt  1,109,861 Other liabilities 3,317,893   Th $ 2,559,158 Equals Shareholder’s equity Th $ 2,559,158

CITGOS’s net income in 2001 was $404 millions, but in 2002 it dropped to $158 millions. If you take the earnings of 2001 as being representative, then ten times those earnings would value CITGO at only $4 billions, which confirms the view that the valuation of $10 billions looks optimistic. However, there may be a buyer, particularly one with crude production, who will be willing to pay a high premium to buy into the USA market.  The major oil companies who already market in the USA may have no interest in CITGO because of monopoly constraints imposed by the government.

What PDVSA should be asked to explain is why CITGO is in so much debt. Gearing (leverage), the ratio of long term debt to capital, is 43 per cent without taking into account the $550 millions of eight-year senior notes which CITGO issued on 27 February 2003.

A comparison with a bond issue that TotalFinaElf intend to make shows just how poor  the credit standing of CITGO is:

                          CITGO Petroleum Co.	          TotalFinaElf Capital

      Amount    $550 millions $100 millions Maturity 8 years 5 years Coupon 11.375 % 5.0% Guaranteed by not guaranteed TotalFinaElf SA Debt rating B-Plus Standard & Poors AA Standard & Poors 

The benchmark for US government bonds is 3 % for 5 year issues, and 4 % for 8 year issues.  It is troubling that CITGO needs to pay twice as much for the funds as TFE (TotalFinaElf).  PDVSA must also feel uncomfortable that the 8 year senior notes are referred to as junk bonds.

Just why CITGO has to pay this exorbitant interest rate is not clear, but undoubtedly the recent political problems in Venezuela, the strike which temporarily disrupted crude oil supplies, and the high gearing have all contributed.  The following statement in PDVSA’S Annual Report for 2001 that The CITGO Petroleum Corporation and PDV Midwest Refining subsidiaries reported joint dividends of 478 million of dollars  shows PDVSA has left CITGO short of cash by extracting most of its profit as dividends.

It is also disturbing to read about the destination of the $550 millions from the debt issue since CITGO may use up to $500 millions to pay a dividend to PDV America, its parent company, to provide funds for the repayment of PDV America’s 7 7/8 % senior notes due August 1, 2003 …. PDVSA is known for being a very well run company, but to borrow funds at 11 3/8 % to pay off a previously incurred debt at 7 7/8 % is certainly not sound finance and shows a lack of good cash management. The Finance Director should be invited to explain how CITGO/PDV America have been allowed to get into such a state.

Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM  was born in El Callao in 1931 where his father worked in the gold mining industry.  He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA).  In 1982 he returned to the UK with his family and retired early in 2002.  Campbell returns frequently to Venezuela and maintains an active interest in political affairs: "I am most passionate about changing the education system so that those who are not academically inclined can have the chance to learn a useful skill ... the main goal, of course, is to allow many of the poor to get well paid jobs as artisans and technicians."  You may contact Oliver L Campbell at email: oliver@lbcampbell.com